Empowering Financial Wellness Through Informed Loan Repayment

In August 2023, the Federal Reserve Bank of New York reported that U.S. consumer Credit card debt had surpassed the $1 trillion mark. Comparatively, Americans have approximately $1.77 trillion in outstanding federal and private student loan debt – over $700 billion more than credit card debt, with the average borrower owing over $37,000.

In June, President Biden signed The Fiscal Responsibility Act of 2023, ending the repayment pause. Interest began to accrue on federal student loans on September 1, 2023, and loan payments officially resumed October 1, 2023.

If you’re one of the estimated 40 million Americans who currently carry student loan debt, you may have questions as to how repayment impacts your credit. Below, VantageScore has outlined key credit scoring facts and topics that will help you, providing you with the foundational knowledge you need to maintain a healthy credit score as payments resume.  

Understanding Your Credit Score

Your credit score is a three-digit number that lenders use to assess your creditworthiness. It is based on several factors, including your payment history, credit utilization, length of credit history, and new credit inquiries.

Student Loans and Credit Reporting

How is student loan debt reported? Here is some credit reporting information student loan borrowers should know:

• Student loan debt is reported to the three Nationwide Credit Reporting Agencies (NCRAs): Equifax, Experian and TransUnion.
• A student loan is a type of installment loan, which means it has a fixed payment for a fixed period of time, like a mortgage or an auto loan.
• Like a mortgage, in many cases the interest you pay on student loan debt is tax deductible.

Does Student Loan Debt Affect Your Credit Score?

Student loan debt does affect your VantageScore credit score. Your overall debt and your payment history are significant factors in calculating your credit score. Consistent, on-time payments can help your score increase while missing payments can have negative impacts on your credit score. As you pay down your student loan, your total debt declines, and you are likely to see your score improve.

Impact on Overall Credit Health

Your student loan debt and repayment history can impact your overall credit health in a number of ways.

• Payment history: Your payment history is an important factor in your credit score. If you make your student loan payments on time and in full each month, you’ll be building a positive payment history. This will help you improve your credit score.
• Credit utilization: Credit utilization is the amount of credit you’re using compared to the total amount of credit available to you. If you have a lot of student loan debt, it can be difficult to keep your credit utilization low. This could hurt your credit score.
• Length of credit history: The length of your credit history is the amount of time you’ve had open credit accounts. The longer your credit history, the better. Student loans can help you build a longer credit history, especially if you’re new to credit.

Student loan debt can hurt your credit score in the short term by increasing your credit utilization and debt-to-income ratio. However, well-managed student loan debt can help build a positive credit history and improve your credit score over time. Consistent, on-time payments reflect positively on your credit report and demonstrate reliability and creditworthiness to lenders. 

What Happens if I Miss a Student Loan Payment?

Taking into consideration that not everyone will be able to make their payments, the Department of Education is providing an on-ramp period to support borrowers as federal student loan payments restart, scheduled to last through September 30, 2024. During this time, borrowers will be protected from having a delinquency reported to credit reporting agencies. While your loan servicer won’t report your loan as being delinquent to the national credit reporting agencies, student loan interest will continue to accrue. If your loans were eligible for the payment pause, you are eligible for the on-ramp.

How Can I Rebuild My Credit After Defaulting on a Student Loan?

Consider entering the Fresh Start Program, an initiative created by the Department of Education to enable defaulted borrowers to restore their repayment status and regain access to other federal student aid benefits and protections. The program is expected to have a positive impact on defaulted borrowers’ credit scores. Upon entering the Fresh Start program:

• Student loans will be transferred to a loan servicer from ED Default Resolution Group
• Student loans are returned to an “in repayment” status
• The default will be removed from the borrower’s credit report

Borrowers can log in in to myeddebt.ed.gov  or call 1-800-621-3115 to claim the Fresh Start Program Benefits.

Learn more about the Fresh Start Program: Fresh Start FAQS

Tips to Manage Student Loans for Better Credit Health

• Make your student loan payment on time and in full each month. This is the most important thing you can do to improve your credit score. Set up autopay to help you avoid late payments.

• Keep your credit utilization low. As you continue to make your monthly student loan debt payments, avoiding taking on new debt when possible. If you have other credit accounts, such as credit cards, try to keep the balance on each account below 30% of your total available credit.

• Leverage an income-driven repayment plan. Income-driven repayment plans can adjust your monthly payments based on your income, providing financial flexibility. Explore your options and choose a plan that best aligns with your financial capacity. In August 2023, the Biden Administration announced the SAVE plan, a new income-driven repayment plan that offers borrowers a number of benefits over current IDR plans, including lower monthly payments, a faster track to loan forgiveness, and protection from interest accrual.

Learn more: What is the SAVE Plan for Student Loans?

• Consider consolidating your student loans. If you have multiple federal student loans, you may be able to consolidate them into a single loan, making it easier to manage payments and track progress. In some cases consolidating student loans can make it harder to access income-driven repayment plans like SAVE or student loan forgiveness programs like Public Service Loan Forgiveness.

• Maintain a Healthy Debt-to-Income Ratio: A balanced debt-to-income ratio is pivotal for a healthy credit score. Manage your debts efficiently and avoid unnecessary financial obligations.

• Monitor Your Credit Reports: Review your credit reports for inaccuracies and dispute any discrepancies you find.

• Avoid making too many hard credit inquiries. When you apply for a new credit account, a hard inquiry is placed on your credit report. Too many hard inquiries in a short period of time can lower your credit score.

Get additional information on preparing for repayment: 7 Tips to Help Borrowers Prepare as Student Loan Payments Restart 

Other Questions

Can I Pay My Student Debt with a Credit Card?
While it is possible, it’s generally not recommended due to higher interest rates on credit cards.

Does Consolidating Student Loans Affect Your Credit Score?
It can have a short-term impact, but responsible management of the consolidated loan can lead to improved credit health over time.

How Long Does It Take for Student Loans to Be Removed from a Credit Report?
Typically, positive information remains on your credit report for up to 10 years, while negative information, like late payments and defaults, can stay for up to seven years

Can I Remove Student Loan Debt from My Credit Report Without Paying?
Legitimate student loan debt cannot be expunged from your credit report without payment. However, inaccuracies can be disputed and corrected.

Effectively managing your student loan repayment is crucial for maintaining your credit health. By understanding your loans and repayment plan options, adhering to timely payments, and monitoring your credit report, you can navigate the complexities of student loan debt and secure your financial future. Explore additional resources to help navigate student loan repayment and find updates on the latest student loan policies and debt relief measures on VantageScore’s Federal Student Loan Repayment Resources, FAQs & News page.

Related Resources

Find answers to critical questions surrounding student loans and repayment in this comprehensive FAQs-style blog post developed by VantageScore in partnership with Dan Currell, former Deputy Under Secretary and Senior Advisor at the U.S. Department of Education:
39 Answers to Student Loan Questions

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